Giamboni, Luigi and Millemaci, Emanuele and Waldmann, Robert (2007): Evaluating how predictable errors in expected income affect consumption.
Download (316Kb) | Preview
This paper studies whether anomalies in consumption can be explained by a behavioral model in which agents make predictable errors in forecasting income. We use a micro-data set containing subjective expectations about future income. The paper shows that, the null hypothesis of rational expectations is rejected in favor of the behavioral model, since consumption responds to predictable forecast errors. On average agents who we predict are too pessimistic increase consumption after the predictable positive income shock. On average agents who are too optimistic reduce consumption.
|Item Type:||MPRA Paper|
|Original Title:||Evaluating how predictable errors in expected income affect consumption|
|Keywords:||Behavioral Economics; Subjective Expectations; Rational Expectations; Consumption and Saving|
|Subjects:||D - Microeconomics > D1 - Household Behavior and Family Economics > D11 - Consumer Economics: Theory
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D84 - Expectations; Speculations
D - Microeconomics > D1 - Household Behavior and Family Economics > D12 - Consumer Economics: Empirical Analysis
|Depositing User:||Emanuele Millemaci|
|Date Deposited:||23. Jan 2009 00:27|
|Last Modified:||15. Feb 2013 23:06|
Attanasio O., (1998). A Cohort Analysis of Saving Behavior by U:S: Households. Journal of Human Resources, 33, 575-609.
Browning, M. and A. Lusardi, (1996). Household Saving: Micro Theories and Micro Facts. Journal of Economic Literature, 34, 1797-1855.
Carroll, C. D., (1992). The Buer-Stock Theory of Saving: Some Macroeconomic Evidence. Brookings Papers on Economic Activity, 2, 61-156.
Chamberlain, G., (1984). Panel Data. In Zvi Griliches and Michael D. Intrilligator, eds. Handbook of Econometrics, Vol. II, Amsterdam: North-Holland, 1247-1318.
Das, M., and B. Donkers, (1999). How Certain are Dutch Households about Future Income? An Empirical Analysis. The Review of Income and Wealth, 45, 325-38.
Dominitz, J. (1998). Earnings Expectations, Revisions, and Realizations. Review of Economics and Statistics,80, 374-388.
Dominitz, J. (2001). Estimation of Income Expectations Models Using Expectations and Realization Data. Journal of Econometrics, 102, 165-95.
Dominitz, J., and C. Manski. (1997). Using Expectations Data to Study Subjective Income Expectations. Journal of the American Statistical Association, 92, 855-867.
Flavin M., (1991). The Joint Consumption/Asset Demand Decision: A Case Study in Robust Estimation. NBER Working Paper, 3802.
Flavin M. (1999). Robust Estimation of the Joint Consumption/Asset Demand Decision. NBER Working Paper, 7011.
Friedman, M., (1957). A Theory of the Consumption Function. Princetown: Princetown University Press.
Giamboni, L. (2004). Do Husbands' and Wives' Predictions Irrationally Diverge?. CEIS working paper, 203.
Hall, R., (1978). Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence. Journal of Political Economy, 86, 971-87.
Hall, R., and F. Mishkin. (1982). The sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households. Econometrica, 50, 461-77.
Jappelli, T. and L. Pistaferri. (2000). Using Subjective Income Expectations to test for Excess Sensitivity of Consumption to Predicted Income Growth. European Economic Review, 44, 337-58.
Ludvigson, M. and Paxson, C., (2001). Approximation Bias in Linearized Euler Equations. Review of Economics and Statistics, 83, 242-56.
Muth, F., (1961). Rational Expectations and the Theory of Price Movements. Econometrica, 29, 315-35.
Zeldes, S., (1989). Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence. Quarterly Journal of Economics, 104, 275-98.